Recommendation: Read the equity market’s view of Toyota
What does the market say?
We’ve seen Toyota’s fundamental earnings. Let’s take a moment to see where the market is valuing Toyota and its competitors, including General Motors (GM), Ford (F), Volkswagen (VOW), and BMW Group. Enterprise value is the market price of a company’s debt plus the equity market capitalization less cash. It’s the total market price of the company. Dividing this by the company’s EBITDA gives you a standardized figure to compare companies. A higher value reflects the market’s expectation of higher future earnings.
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Toyota’s enterprise value to EBITDA declined from 14x in 2010 to less than 10x now. Often, when we see this trend, it reflects investors’ reduced earnings expectations. In this case, Toyota’s market capitalization increased from $222 billion at fiscal year end 2010 to $197 billion at fiscal year end 2014. EBITDA increased from $17 billion to $33 billion. So market capitalization increased 56% over four years and EBITDA increased 106% over the past four years. Essentially, the market capitalization looked through Toyota’s cyclicality and the impacts of the yen depreciation and the recalls in the U.S.
Free cash flow yield is a company’s free cash flow per share compared to a company’s stock price per share. Free cash flow for this calculation is cash flow from operations less capital expenditures. Share price is the market price. Both numerator and denominator are divided by the number of shares outstanding. This connects the company’s free cash flow generation and the market price in terms of yield—how much free cash flow a company is generating compared to the price of one share of its stock.
As you can see from the chart above, Toyota’s free cash flow yield is increasing and is currently at 14.4 versus GM’s 12.7x. This is from the denominator, the market value per share of Toyota declining from $122 per share on January 1, 2014, to $114 on June 9, 2014. In this instance, Toyota is the leader. Toyota is investing in R&D (research and development) for new products, has free cash flow to internationalize its manufacturing footprint, and has significant market share in leading economies. Overall, you could buy the index by buying the exchange-traded fund CARZ.